Trendlines Group (LHS)

Transcription

1 Singapore Company Guide Version 1 Bloomberg: TTGL SP Reuters: THET.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 26 Feb 2016 BUY Last Traded Price: S$1 (STI : 2,619.96) Price Target : S$8 (33% upside) Potential Catalyst: Exits from portfolio companies Where we differ: Not applicable Analyst Sachin Mittal sachinmittal@dbs.com What s New Portfolio Value growth of 12% y-o-y was largely in line with our expectations One-off, non-cash IPO-related expenses impacted the bottom line adversely Exit from one of the three most valuable portfolio companies remains a key catalyst in FY16 Maintain BUY with an unchanged TP of S$8 Price Relative S$ Nov-15 (LHS) Relative STI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue EBITDA (2.0) Pre-tax Profit (2.9) (1.8) Net Profit (2.8) (3.3) Net Pft (Pre Ex.) (2.8) Net Pft Gth (Pre-ex) (%) nm nm 1, EPS (S cts) (10.0) (0.9) EPS Pre Ex. (S cts) (10.0) EPS Gth Pre Ex (%) nm nm 1, Diluted EPS (S cts) (10.0) (0.9) Net DPS (S cts) BV Per Share (S cts) PE (X) nm nm PE Pre Ex. (X) nm P/Cash Flow (X) nm nm nm nm EV/EBITDA (X) nm Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) 0.0 CASH CASH CASH ROAE (%) (5.3) (3.9) Earnings Rev (%): () (24) Consensus EPS (S cts): - - Other Broker Recs: B: 1 S: 0 H: 0 Source of all data: Company, DBS Bank, Bloomberg Finance L.P Decent portfolio growth masked by poor earnings Leading Technology incubator in Israel. Trendlines (TTGL) is a seed-stage investor in medical device developers and agriculture technology start-ups. Increasing ageing population and growing demand for sophisticated medical devices will spur investments in medical device developers. Rising global demand for food and clean water will help attract funds for Agtech. TTGL intends to expand its business to Singapore, Germany and China in FY16. Growth in FY15 book value was largely in line with our estimates. Fair value (FV) of investments in portfolio companies increased 12% y-o-y to US$84.5m versus our US$86.5m estimate. This came from incorporation of five new portfolio companies in FY15 and gains in FVs of 15 portfolio companies partially offset by declines in FV of 18 portfolio companies. However, bottom line was hit by one-off non-cash expense from conversion of Redeemable Convertible Bonds (RCL) into the shares at the IPO. Excluding this one-off expense, Trendlines would have reported a net profit of US$2m. Three portfolio companies have engaged investment banks to explore M&A option. We expect TTGL to successfully exit from one of the three portfolio companies in FY16F. In the past, TTGL has exited at 3x-67x the book value of the portfolio companies. We forecast a CAGR of 16% in the portfolio value over FY15-17F versus 18% average over FY With net cash of US$19m, TTGL can operate for another two years even if TTGL is not able to exit from any of its investments. Valuation: Based on FY16F P/BV of 1.1x (versus selected peers trading at 1.3x) and an estimated book value per share of S$5 in FY16F, we estimate a one-year target price of S$8. Key Risks to Our View: Failure to exit from existing investments may lead to negative cash flow and losses hurting its book value. TTGL operates in a high risk-high reward technology startups space and writedowns of portfolio value can not be ruled out At A Glance Issued Capital (m shrs) 509 Mkt. Cap (S$m/US$m) 107 / 76.0 Major Shareholders (%) Bronfeld Zeev 14.3 Amos And Daughters Inv And Prop 7.7 Free Float (%) m Avg. Daily Val (US$m) 0.85 ICB Industry : Technology / Technology Hardware & Equipment ed: TH / sa: AS

2 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Fair value gains the main source of revenue. Over 60% of Trendlines' revenues are generated through fair value (FV) gains of companies held in its portfolio. Each portfolio company held by Trendlines is valued quarterly to recognise any FV gains/losses arising from the investment. Portfolio companies are valued by independent external parties and the valuation depends on the successful development and commercial viability of products developed by the portfolio companies. We estimate that the average FV gains as a percentage of total portfolio value over the past three years was 18%. Expansion to new markets. Trendlines has expressed intentions of setting up incubators in Singapore, China and Germany through strategic partnerships and joint ventures. It intends to set up an incubator in Singapore as early as Singapore was ranked among the top 10 destinations for technology startups by Business Insider in 2015 citing extensive support by the Singaporean government as a distinctive advantage. China has also witnessed a significant increase in technology start-ups over the past years. We believe these expansions would accelerate deal flow and possibly increase the average number of new companies incorporated per year from 9 to Growth in Portfolio % Average investment in a company Net Portfolio movement (No. of Companies) US$19m in potential investments for Agtech companies. Trendlines recently announced a memorandum of understanding (MoU) with an undisclosed multi-national corporation to establish a fund of c.us$10m to be managed by Trendlines. This fund will invest in companies formed under Trendlines Agtech. In addition, Saviva Capital has committed US$9.2m for investment in Trendlines Agtech A 2015A 2016F 2017F In-house technologies may secure royalty revenue in the future. Trendlines Labs, established as a business unit in 2011, invents and develops technologies for sale or licensing to others or for transfer to one of the incubators for further development and commercialisation. Trendlines Labs also enters into agreements with third-party technology companies to develop technologies for a fee. Trendlines Labs has already established R&D and joint venture agreements with various institutions and multinational corporations in the US, Israel, Middle East and Japan. Balance Sheet: Strong financial position backed by favourable cash position. With the receipt of IPO proceeds, cash and cash equivalents now account for over 20% of total assets. Trendlines experiences low levels of leverage with deferred tax liabilities accounting for over 50% of its long-term liabilities. However, with changes in the FV of portfolio companies, which makes up over 80% of the total assets, the company could experience volatilities in its financial position. Page 2

3 Share Price Drivers: Strong growth projected in Medtech. Increasing ageing population, improving health consciousness of developing markets and rising demand for sophisticated medical equipment will fuel growth of the Medical device segment of Trendlines. Tightening regulatory conditions of the medical device manufacturing industry in developed markets such as US will also open possible avenues to exit investments, with US companies looking to establish operations outside of the region. Visiongain predicts the global medical devices market to reach US$398bn by Agtech looks lucrative. Increasing global demand for food with rising population and environmental challenges will put more emphasis on Agriculture research. Research on food tech, water savers and waste management will attract most funding, according to MarketResearch.com. Trendlines has already made investments in companies conducting research in the above fields. Key Risks: Business model of investing in high-risk, high-return technology start-up space. Trendlines invests in early stage high-risk technology start-ups which often take 5-6 years to generate returns. Realising a return on the investment is dependent on a multitude of factors and the risk of failure tends to be high. Investments in over 35% of companies (c.18 companies) declined in value in FY15. Lack of exits could create cash-flow problems. Exits from portfolio companies are the main source of cash generation for Trendlines; and, failure to exit from existing portfolio companies could restrain the ability of the company to fund new investments and day-to-day operations which could threaten the survival of the company. However, Trendlines has enough cash to fund its operational expenses for the next two years and low levels of leverage experienced by the company will allow it to secure funding through debt securities, should there be cash flow problems. Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure US$ 0.0 Capital Expenditure (-) ROE (%) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Forward PE Band (x) (x) sd: 23.2x Valuation of portfolio companies is highly subjective. Valuation of portfolio companies which has a material impact on the financial health of the company is is highly subjective. FV of portfolio companies account for over 80% of total assets and changes in FV of portfolio companies account for over 60% of Trendlines top line. The company does not publish valuations of individual companies or the valuation methodology as such disclosures may cap the valuations that portfolio companies are able to negotiate for when listing or selling their business. Company Background A government-franchised technology incubator based in Israel that invests and assists technology start-ups to develop and commercialise their products. Portfolio companies incorporated by Trendlines gain access to government funds of over half a million dollars each. This allows Trendlines to reduce its initial investment, which expands the potential investment pool and minimises potential write-offs Nov-15 (x) Nov-15 PB Band (x) +1sd: 18.6x Avg: 13.9x 1sd: 9.2x 2sd: 4.6x +2sd: 1.4x +1sd: 1.17x Avg: 0.94x 1sd: 0.72x 2sd: 9x Page 3

4 Key Assumptions FY Dec Growth in Portfolio % Average investment in a Net Portfolio movement Income Statement (US$m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc (6.2) (1) (7.6) (7.8) (8.4) Operating Profit 23.3 (2.1) Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc () (0.8) () () () Exceptional Gain/(Loss) (3.8) Pre-tax Profit 22.9 (2.9) (1.8) Tax (6.2) (1.4) (1.8) (2.6) (2.9) Minority Interest (0.8) () () Preference Dividend Net Profit 16.0 (2.8) (3.3) Net Profit before Except (2.8) EBITDA 23.3 (2.0) Growth Revenue Gth (%) (71.6) EBITDA Gth (%) nm nm Opg Profit Gth (%) nm nm Net Profit Gth (Pre-ex) (%) nm nm 1, Margins & Ratio Gross Margins (%) Opg Profit Margin (%) 78.9 (24.7) Net Profit Margin (%) 54.1 (33.5) (33.8) ROAE (%) 31.1 (5.3) (3.9) ROA (%) 2 (3.4) (3.0) ROCE (%) 22.7 (2.7) Div Payout Ratio (%) 0.0 N/A N/A Net Interest Cover (x) 64.8 (2.7) Page 4

5 Balance Sheet (US$m) FY Dec Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets Strong cash position will provide some leeway if exits are delayed. ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity Minority Interests Total Cap. & Liab Non-Cash Wkg. Capital (2.1) (3.6) (3.1) (2.1) (2.2) Net Cash/(Debt) (1.0) (2.7) Debtors Turn (avg days) Creditors Turn (avg days) N/A N/A N/A N/A N/A Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH Net Debt/Equity ex MI (X) 0.0 CASH CASH CASH Capex to Debt (%) Z-Score (X) Page 5

6 Cash Flow Statement (US$m) FY Dec Pre-Tax Profit 16.7 (4.2) (3.6) Dep. & Amort Tax Paid Assoc. & JV Inc/(loss) (0.5) Chg in Wkg.Cap () () Other Operating CF Net Operating CF (4.0) (7.0) (6.1) (5.5) (4.4) Capital Exp.(net) () 0.0 () () () Other Invts.(net) () Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF () () Div Paid Chg in Gross Debt (0.5) (0.5) Capital Issues Other Financing CF Net Financing CF (0.5) (0.5) Currency Adjustments Chg in Cash 1.58 (1.7) 20.6 (6.2) (5.1) Opg CFPS (US cts.) (15.1) (25.5) (1.7) (1.4) (1.2) Free CFPS (US cts.) (16.4) (24.9) (1.7) (1.6) (1.3) Negative operating cash flows inherent to the business model. Target Price & Ratings History 3 S$ 8 3 Closing Ta rge t S.No. Date Rating Price Price 1 11 Feb BUY Nov-15 Dec-15 Jan-16 Feb-16 Source: DBS Bank Note : Share price and Target price are adjusted for corporate actions. Page 6

7 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the DBS Vickers Group ) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group )) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) (b) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 26 Feb 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). Page 7

8 COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 Jan DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia Hong Kong Indonesia Malaysia This report is being distributed in Australia by DBS Bank Ltd. ( DBS ) or DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 ( CA ) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaning of the CA. This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission. This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia. This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Wong Ming Tek, Executive Director, ADBSR Singapore Thailand United Kingdom Dubai This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No E) or DBSVS (Company Regn No G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at for matters arising from, or in connection with the report. This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it. This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients. This research report is being distributed in The Dubai International Financial Centre ( DIFC ) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box , 3 rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. Page 8

9 United States Other jurisdictions This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore Tel Company Regn. No E Page 9